Medical Office Deliveries Decline Amid Rising Investor Interest
New medical office space falls short of decade average
The construction of medical office buildings is entering a period of notable contraction. According to Marcus & Millichap’s national report on medical office assets for the first half of 2025, total completions are set to fall a million square feet below the average 11 million square feet seen over the last decade. This reduction in new supply is poised to intensify demand and exert upward pressure on prices, though the impact is unlikely to be uniform across markets.
Texas, Florida, and California—representing 30% of national deliveries in 2024—are projected to account for half of all completions in 2025. This shift creates short-term supply constraints in certain metropolitan areas, notably Houston, Dallas-Fort Worth, Sacramento, and Orlando. In contrast, several other regions, including Boston, Atlanta, and Nashville, will see their volumes drop by at least 40%, resulting in very different local dynamics and potentially less price pressure.
Older MOBs built before 1980 currently exhibit vacancy rates that are 2 percentage points higher than those constructed since 2010, revealing a growing obsolescence factor within aging inventory. This trend is likely to gain importance as the demand for medical office space increases: the population aged 65 and older is expected to grow by 10% over the next five years, supporting long-term demand for modern facilities.
Outpatient care is at the forefront of expansion, with service volumes forecast to rise by 10.6% in the next five years, compared to just 0.9% for inpatient volumes. While demand from healthcare providers contributes to growth, headwinds remain. Administrative and skilled labor costs continue to climb, and patients themselves face healthcare expenses rising faster than inflation—conditions that could prompt some to postpone non-essential care, creating barriers to the sector’s expansion.
Investment activity in medical office buildings surged approximately 40% in the twelve months ending June 2025, Marcus & Millichap reports. The bulk of transaction volume—95%—occurred in the sub-$10-million category, with buyers often targeting lower-priced properties for value-add strategies, including conversions, portfolio improvements, and deals involving deferred-maintenance or high-vacancy assets.
Borrowing costs have limited capital-intensive purchases and reduced activity in the above-$10-million segment, further concentrating sales within the Sun Belt. Currently, eight of the 10 most active metros for MOB transactions are located in the region, led by Dallas-Fort Worth and Phoenix. Chicago and Philadelphia also rank among the top cities, buoyed by some of the nation’s highest proportions of residents aged 65 and over. Meanwhile, investment activity is waning in California’s major metros—San Francisco, Los Angeles, and San Jose—with figures dropping at least 30%.
Rising construction costs and forecasts of shortages of up to 86,000 doctors and nurses by 2036 are expected to further limit new development. These constraints suggest supply will remain tight, sustaining pressure for expansion even as the market contends with evolving challenges.
(Globe Street | By Erik Sherman)
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